Virgin Money ISA closue

flaneurs_lobster

mar7t1n said:

clairec666 said:

Without getting into a debate about whether 6.5% or 4% is better
(clue - higher rate = more interest)

Sorry, I think you may have misread my point. What I mean is:

• If you put the whole £3,000 into a fixed-rate account in month 1 at 4%. [Interest £120.00]

• Drip-feeding the same £3,000 into a regular saver at £250 a month at 6.5%. [Interest £105.63]

Where are you keeping the £3k that you are feeding the  RS from?

Run the numbers again.

Put the whole £3k into an easy access @ 4%
Feed the 6.5% RS £250 from the EA monthly.

The two accounts are not mutually exclusive, you are just maximising the rate whenever you can.
Easy really, 6.5% is bigger than 4%.

Bobblehat

mar7t1n said:

clairec666 said:

Without getting into a debate about whether 6.5% or 4% is better
(clue - higher rate = more interest)

Sorry, I think you may have misread my point. What I mean is:

• If you put the whole £3,000 into a fixed-rate account in month 1 at 4%. [Interest £120.00]

• Drip-feeding the same £3,000 into a regular saver at £250 a month at 6.5%. [Interest £105.63]

With regular savers, the headline rate can be misleading. Because you only build up the balance gradually, the net effective APR is roughly half the quoted rate.

That’s why it’s important to run the actual numbers based on the rates available at the time, rather than just chasing a headline rate. Once you factor in tax, and admin - which wins is entirely down to what you can get at the time.

Where would you be drip-feeding the RS from? Surely not an account paying 0%? Total interest over the year over both accounts beating £120?

Edit: F-L beat me to it

flaneurs_lobster

MSE have a calculator that works the numbers for you at 

https://www.moneysavingexpert.com/savings/regular-savings-calculator/

Your example gives

Your Results

Drip-feeding the regular saver

After drip-feeding the cash for 12 months, you'd have earned...

£160 in interest
£105 from the regular saver + £55 from the normal savings account

Leaving it in normal savings

If you'd kept the cash in normal savings without drip-feeding it, you'd have earned...
£118 in interest

mar7t1n

I'm not sure if you agreeing with me or arguing against here. With the 4% account you can put the full £3000 in on day one. With a regular save you have to drip feed the money in at £250 each month. The Headline rate of 6.5% thus only generates you 3.25% over the year. Obviously only applicable if you have the money available already.

surreysaver

mar7t1n said:

clairec666 said:

Without getting into a debate about whether 6.5% or 4% is better
(clue - higher rate = more interest)

Sorry, I think you may have misread my point. What I mean is:

• If you put the whole £3,000 into a fixed-rate account in month 1 at 4%. [Interest £120.00]

• Drip-feeding the same £3,000 into a regular saver at £250 a month at 6.5%. [Interest £105.63]

With regular savers, the headline rate can be misleading. Because you only build up the balance gradually, the net effective APR is roughly half the quoted rate.

That’s why it’s important to run the actual numbers based on the rates available at the time, rather than just chasing a headline rate. Once you factor in tax, and admin - which wins is entirely down to what you can get at the time.

It's obvious 6.5 is more than 4. If you cannot see that, then I'm not sure how to explain it.

You have £3k in an account paying 4%.  You open another account paying 6.5%, into which you can only pay £250 per month.
Month 1:
6.5% account has £250
4% account has £2,750

Month 2:
6.5% account has £500
4% account has £2,500
and so on

Or, if you didn't have £3k to start with, but could save £250 per month, would you put it into an account paying 4%, or an account paying 6.5%?

People who get confused make it sound complicated, but it really is as simple as 6.5 is a bigger number than 4.

Perhaps it would be easier if the bank offered an account paying 6.5% into which you could pay in £1.5k on day 1 and nothing for the rest of the year. That would save all these arguments.

surreysaver

mar7t1n said:

I'm not sure if you agreeing with me or arguing against here. With the 4% account you can put the full £3000 in on day one. With a regular save you have to drip feed the money in at £250 each month. The Headline rate of 6.5% thus only generates you 3.25% over the year. Obviously only applicable if you have the money available already.

You're wrong. The headline rate is 6.5% and that generates 6.5% over the year. 
Day one you put £2,750 into the account paying 4%, and £250 into the account paying 6.5%.
Then on day 31 (or 32 if the first month had 31 days in it) you move £250 from the account paying 4% into the account paying 6.5% and so on, until the account paying 4% has £0 in it and the account paying 6.5% has £3k in it.

Or you could open 12 accounts paying 6.5% on day 1, pay £250 into each of them and nothing for the rest of the year and not bother with the 4% account.

slinger2

mar7t1n said:

I'm not sure if you agreeing with me or arguing against here. With the 4% account you can put the full £3000 in on day one. With a regular save you have to drip feed the money in at £250 each month. The Headline rate of 6.5% thus only generates you 3.25% over the year. Obviously only applicable if you have the money available already.

True.

If you drip feed £250 each month into the 4% account you'll only get 2% over the year, based on the final balance.

If I put £3,000 in an account I get twice as much interest as if I'd put £1,500 in it.

If I put money into a 6.5% account I'll get 60% more interest than if I'd put it into a 4% account.

flaneurs_lobster

mar7t1n said:

I'm not sure if you agreeing with me or arguing against here. 

I'm not sure either.

Is your problem that a regular saver account can be described as having an interest rate of 6.5% yet it only returns 3.25% if funded maximally for a year?

That's down to you not quite understanding what Annual Percentage Rate actually means.

Would you agree that the first £250 into the RS earns 6.5% if still there in 12 months time?
The second tranche of £250 will earn 11/12ths of the first tranche but the rate is the same.

The APR describes the rate applying to funds if annualised. It does not describe the percentage return. This is why the Summary document for any savings account will give an example of the amount of return for a given monthly deposit - it should remove any misunderstanding.

Bobblehat

mar7t1n said:

I'm not sure if you agreeing with me or arguing against here. With the 4% account you can put the full £3000 in on day one. With a regular save you have to drip feed the money in at £250 each month. The Headline rate of 6.5% thus only generates you 3.25% over the year. Obviously only applicable if you have the money available already.

I'll make it even simpler ..... just ignore what you think the overall percentage is .... you take the £118 (~£120) and I'll take the ~£160. Same starting point, me ~£40 better off one year later 

clairec666

mar7t1n said:

clairec666 said:

Without getting into a debate about whether 6.5% or 4% is better
(clue - higher rate = more interest)

Sorry, I think you may have misread my point. What I mean is:

• If you put the whole £3,000 into a fixed-rate account in month 1 at 4%. [Interest £120.00]

• Drip-feeding the same £3,000 into a regular saver at £250 a month at 6.5%. [Interest £105.63]

With regular savers, the headline rate can be misleading. Because you only build up the balance gradually, the net effective APR is roughly half the quoted rate.

That’s why it’s important to run the actual numbers based on the rates available at the time, rather than just chasing a headline rate. Once you factor in tax, and admin - which wins is entirely down to what you can get at the time.

I think everyone else has explained it quite succinctly, but I'll add my bit since you were replying directly to me.

Yes, your calculations are correct, but they fail to take into account when you have the £3000 available. If you have a lump sum available at the start of the year then you can earn £105 by drip-feeding it into the 6.5% regular saver, but most months the excess money will be sitting in another account earning interest. For the sake of arguments let's say you can't get as good a rate as your 4% fix, say 3.5% variable, but combined with the money from the regular saver you will get a higher total than if you'd got 4% on the lot.

Maybe think about it on a month-by-month basis. I've got £x right now, where will I get the best return for it over the next month? 1/12 of 4% or 1/12 of 6.5%?
Clearly regular savers are restricted by how much you can put in each month, so you might not be able to get the best rate for the full £x.

Please ask if you still want further explanation - we're happy to help.